Auto Insurance: Credit Builder Or Not?

Paying car insurance does not directly build credit. However, if you pay your monthly car insurance premiums on time and with a credit card, it could improve your credit score. This is because credit scores are based on the contents of TransUnion, Equifax and Experian credit reports, which document our history of borrowing and repaying money via loans and lines of credit.

Paying auto insurance with a credit card

While paying auto insurance won't directly build your credit score, it's still important to pay your premiums on time. If you don't, your debt may be turned over to a collection agency, which can affect your credit report and score.

Using a credit card to pay your auto insurance can be beneficial, but it requires financial discipline. Here are some pros and cons of paying your auto insurance with a credit card:

Pros:

• Convenience: Paying with a credit card can be more convenient than other payment methods, especially if you set up automatic payments.
• Rewards: If you have a rewards credit card, you can earn points, miles, or cash back on your insurance payments.
• Security: Credit cards typically offer better fraud protection than other payment methods.
• Cash Flow Management: If you have a rewards credit card with a grace period, you can free up cash for other expenses or investments.

Cons:

• High-Interest Rates: If you don't pay off your credit card balance in full each month, you may incur high-interest charges, making your insurance more expensive in the long run.
• Fees: Some insurance companies and credit card issuers charge processing or convenience fees for credit card payments.
• Credit Score Impact: Missing credit card payments or carrying a high balance can negatively affect your credit score, making it harder to obtain loans and other types of credit.
• Temptation to Overspend: Using a credit card may make it easier to overspend or rely on credit for other purchases, leading to a cycle of debt.

When deciding whether to pay your auto insurance with a credit card, consider your financial habits and ensure you only spend what you can afford to pay off each month.

Credit score impact on auto insurance rates

Credit scores can have a significant impact on auto insurance rates. While paying car insurance doesn't help build credit, a person's credit score can affect their car insurance rate. According to various studies, people with lower credit scores tend to cost insurance companies more money, and as a result, insurance companies charge higher rates to people with lower credit scores.

In most states, a higher credit score decreases your car insurance rate, while poor credit increases your rate. Poor credit can lead to a major jump in insurance prices, with rates increasing by 72% on average compared to having good credit. This difference can amount to more than $250 per month or a $70 difference in monthly car insurance rates.

The impact of credit scores on insurance rates varies across states and companies. Some states, such as Arizona, New York, Texas, New Hampshire, New Jersey, Minnesota, and New Mexico, have higher increases in insurance rates for drivers with poor credit. In contrast, other states, such as California, Hawaii, Massachusetts, Michigan, and Washington, ban the use of credit reports in determining insurance rates and instead base rates on driving records, location, and other factors.

While getting a car insurance quote doesn't affect your credit score, it's important to note that insurance companies do consider credit scores when determining insurance rates. They use an "insurance score" based on an individual's credit report to assess the risk from an auto insurance perspective. This score helps them determine the likelihood of an individual making a claim.

Additionally, using a credit card to pay for car insurance can indirectly affect your credit score. Making timely and full payments on your credit card can positively impact your score, while late payments or a high credit utilisation ratio can negatively affect it.

Debt collection reports

Collection accounts can arise from unsecured accounts, such as credit cards and personal loans, as well as secured loans, including auto loans. If your auto loan defaults, the lender may repossess your car and sell it at auction. If the amount the car is sold for is less than the full amount owed, the remaining debt can still be sent to a collection agency.

Debt collection agencies are bound by federal laws and regulations that outline what they can and cannot do. The Fair Debt Collection Practices Act (FDCPA) prohibits abusive, unfair, or deceptive practices by debt collectors. Under the FDCPA, debt collectors cannot:

• Contact you before 8 a.m. or after 9 p.m., unless you agree
• Contact you at work if your employer doesn't allow personal calls
• Contact you by email or text message if you ask them to stop
• Call you more than seven times within a seven-day period or within seven days after speaking with you about a specific debt
• Send private messages on social media if you ask them to stop
• Threaten or use obscene language
• Lie about the amount you owe or your rights
• Try to collect interest, fees, or charges on top of the debt unless allowed by the original contract or law
• Deposit a post-dated check early
• Publicly reveal your debts, such as by sending postcards or putting information on envelopes

If you are contacted by a debt collector, they must provide "validation information" about the debt, including the name and address of the collector, the name of the creditor, the amount owed, and instructions on what to do if you dispute the debt. You have the right to dispute the debt within 30 days, and the collector must send written verification before contacting you again to collect payment.

If you are facing debt collection, it is important to understand your rights and the potential impact on your credit score. Debt collection can affect your ability to obtain loans, credit cards, and other financial products in the future.

Credit-based insurance scores

The factors that go into calculating a credit-based insurance score include:

• Payment history of credit accounts, including payments made on time and missed payments
• Accounts in collections
• Credit card balances and credit limits
• The age of credit accounts
• Types of credit used
• Amount of past-due debt
• Whether you have recently applied for credit

Improving credit score

Improving your credit score takes time and effort, and there is no one-size-fits-all solution. However, there are several strategies you can use to boost your credit score. Here are some detailed and direct tips to help you improve your credit score:

• Pay your bills on time: Payment history is the most significant factor in determining your credit score. Make sure to pay at least the minimum amount due on your credit card bills and loans every month. Set up automatic payments or due-date alerts to ensure timely payments.
• Maintain a low credit utilisation rate: Aim to keep your credit utilisation below 30%. This rate is calculated by dividing your current revolving credit usage by the total credit available to you. You can lower your utilisation rate by paying down your credit card balances, requesting a credit limit increase, or making multiple payments throughout the month to keep your balance low.
• Diversify your credit mix: Lenders like to see a variety of account types, such as credit cards, student loans, mortgages, and other loans. Maintaining a solid payment history across different types of credit accounts can demonstrate your understanding of credit fundamentals.
• Keep old accounts open: Avoid closing old credit accounts, even if you no longer use them. Closing accounts can shorten the length of your credit history and reduce your overall available credit, which may negatively impact your score.
• Limit new credit applications: Each new credit application triggers a hard inquiry, which can remain on your credit report for up to two years and negatively impact your score. Only apply for new credit when necessary, and consider the impact on your credit utilisation and the average age of your credit accounts.
• Dispute credit report errors: Regularly review your credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion) and dispute any inaccuracies or errors. This includes incorrect late payments, someone else's credit activity, or negative information that is too old to be listed.
• Build a long credit history: Lenders prefer established lines of credit. The longer your credit history, the more favourable it appears to lenders. Consistently make timely payments to build a positive credit history over time.
• Use a secured credit card: If you're new to credit or rebuilding your score, consider a secured credit card. These cards require a cash deposit upfront, which serves as your credit limit, and they help build a positive payment history.
• Get credit for rent and utility payments: Services like Experian Boost and rent-reporting services can include your on-time rent and utility payments in your credit reports, which can positively impact your score.
• Consider credit counselling: If you're struggling with significant debt, credit counselling services can provide guidance and support. They can help you create a budget, develop a repayment plan, and negotiate with lenders for better terms.

Remember, improving your credit score takes time, and it's important to understand the factors that influence your score, such as payment history, credit utilisation, credit mix, and credit history. Be patient and consistent in implementing these strategies, and you will see positive changes in your credit score over time.

Frequently asked questions